Author – KAJAL PRAJAPATI , SHRI RAMSWAROOP MEMORIAL UNIVERSITY
Headline of the Article
Deception in Diagnostics: The SEC v. Theranos, Inc. Securities Fraud Case
To the Point
This article examines the high-profile securities fraud case involving Theranos, Inc., its founder Elizabeth Holmes, and former President Ramesh “Sunny” Balwani. The U.S. Securities and Exchange Commission (SEC) charged the company with raising over $700 million from investors through a fraudulent scheme that exaggerated the company’s technological capabilities and financial performance.
Use of Legal Jargon
Securities Fraud: A form of serious white-collar crime involving misrepresentation of information investors use to make decisions.
•Material Misrepresentation: A false statement that influences a reasonable investor’s decision.
•Scienter: A legal term that means intent or knowledge of wrongdoing.
•Due Diligence: A process of verification, investigation, or audit of a potential investment.
Civil Enforcement Action: Legal steps taken by regulatory agencies to impose penalties for violations of law without criminal prosecution.
Injunction: A court order that requires a party to do or refrain from specific acts.
The Proof
What Was Theranos?
Founded in 2003 by Elizabeth Holmes, Theranos claimed to revolutionize blood testing using a small finger-prick method instead of traditional blood draws. Holmes dropped out of Stanford at 19 and pitched her idea as a revolutionary leap in medical diagnostics.
The Alleged Fraud
Between 2013 and 2015, Theranos raised hundreds of millions in capital. The SEC alleged that Theranos, Holmes, and Balwani made materially false and misleading statements regarding:
The accuracy and reliability of their blood testing technology.
The usage of their devices by the U.S. Department of Defense.
Their revenue projections (claiming hundreds of millions while earning negligible revenue).
Claims that major pharmaceutical companies endorsed Theranos’ technology.
In reality:
- The technology failed most internal quality checks.
- Theranos used commercial machines from other manufacturers for most tests.
- No significant contracts existed with the military or pharmaceutical giants.
Abstract
This case study explores the fall of Theranos, once a Silicon Valley unicorn, from a $9 billion valuation to criminal convictions. The article breaks down how regulatory gaps, media hype, and lack of scientific scrutiny enabled one of the biggest corporate frauds in U.S. history.
The SEC’s civil case was accompanied by criminal charges from the Department of Justice. The case not only emphasized corporate accountability and investor protections, but also exposed critical weaknesses in private market oversight.
Case Laws & Legal Actions
- SEC v. Holmes & Balwani (2018)
Civil enforcement action brought by the SEC for securities fraud violations under:
Securities Act of 1933
Securities Exchange Act of 1934
Outcome:
Holmes agreed to pay a $500,000 fine, return 18.9 million shares, and relinquish her voting control of Theranos.
Balwani chose to contest the charges.
- United States v. Elizabeth Holmes (2021–2022)
Criminal trial in U.S. District Court for the Northern District of California.
Charges:
Wire fraud and conspiracy to commit wire fraud.
Misleading investors and patients about Theranos’ capabilities.
Verdict (2022):
- Holmes was convicted on 4 counts of fraud.
- Sentenced to 11 years and 3 months in federal prison.
3. United States v. Ramesh “Sunny” Balwani (2022)
Verdict:
- Found guilty on all 12 criminal charges.
- Sentenced to 12 years and 11 months in federal prison.
Conclusion
The Theranos case is a landmark in modern corporate fraud and stands as a cautionary tale for investors, regulators, and the startup ecosystem. It reveals the risks of unchecked innovation, blind faith in founders, and lack of transparency in private companies.
From a legal standpoint, the case reinforces the importance of:
Robust due diligence by investors.
Timely regulatory oversight.
The need for scientific validation in health-related claims.
While the SEC’s intervention came after millions were lost, the combined civil and criminal cases demonstrate how U.S. laws are equipped to hold executives accountable for misleading the public.
FAQ
Q1: What law did Theranos violate?
They violated the Securities Act of 1933 and Securities Exchange Act of 1934, particularly provisions against fraudulent misrepresentations in the sale of securities.
Q2: Was Elizabeth Holmes criminally convicted?
Yes. She was found guilty of four counts of wire fraud and sentenced to over 11 years in prison.
Q3: Why did investors believe in Theranos?
Due to Holmes’ personal charisma, high-profile board members, media coverage, and fabricated documents suggesting third-party validation.
Q4: Was anyone from the board of Theranos held legally responsible?
No. While criticized, most board members were not legally charged as they were misled along with investors.
Q5: What is the current status of Theranos?
The company was dissolved in 2018, and Holmes began serving her prison sentence in 2023.
